For years, the country’s public pension plans have faced a yawning gap between what they owe and what they can pay.

From the State of California’s public employees’ retirement plan, with more than 1.6 million participants, to tiny funds for employees of local mosquito-control programs in Illinois, public pensions are the time bomb of government finance.

Now the coronavirus pandemic has it ticking faster.

Already chronically underfunded, pension programs have taken huge hits to their investment portfolios over the past month as the markets collapsed. The outbreak has also triggered widespread job losses and business closures that threaten to wipe out state and local tax revenues.

That one-two punch has staggered these funds, most of which are required by law to keep sending checks every month to about 11 million Americans.

Last week, Moody’s investors service estimated that state and local pension funds had lost $1 trillion in the market sell-off that began in February. The exact damage is hard to determine, though, because pension funds do not issue quarterly reports.

“You’re not going to see real data on the market crash until Christmas,” said Girard Miller, a former chief investment officer of the Orange County, Calif., pension fund and a former member of the Governmental Accounting Standards Board.

And that data will not count the knock-on effects of the economic downturn, which would short-circuit pension funds’ ability to hit up taxpayers for bigger contributions. About 3.3 million people filed for unemployment benefits in the most recent week reported — a record by a huge margin — and further layoffs are inevitable. Thousands of taxpaying businesses are also losing revenue because of stalled operations, and some might be forced to close permanently.

“The people have no money,” said Maria Pappas, the treasurer of Cook County, Ill.

Even before the pandemic gut-punched the economy, Ms. Pappas counted a record 57,000 delinquent property-tax payers in her county, which includes Chicago. Property taxes feed more than 400 municipal pension funds in Cook County, including some that are cash-starved and close to hitting bottom.

“It’s like a rubber band that’s been stretched too thin,” she said. “What I’m telling you is, the rubber band is about to break.”

The coronavirus outbreak could test the sacred nature of these programs in ways that even the crisis of 2008 did not, and ultimately force state and local governments to engage in complicated and perhaps unwinnable fights to reduce or slow the growth of benefits.

Failure to raise more money or reduce payouts could have dire consequences. Pension funds that run out of money — something that happened in Prichard, Ala., Central Falls, R.I., and Puerto Rico — could tip cities and other local governments into bankruptcy. States would be in uncharted waters because there is no bankruptcy mechanism for them; the nearest analogy is a one-off law passed by Congress for Puerto Rico, which has resulted in years of federal oversight, austerity measures and reduced debt payments to bondholders.

Public pension programs have long been endangered by a fundamental tension: With growing ranks of retirees and mature workers, they should invest conservatively, like someone on the cusp of retirement, shifting into high-quality bonds, for example, with durations timed to reflect scheduled future payments to retirees.

Instead, they often take on the kind of risk appropriate for someone with decades to go.

The accounting rules governing public pension plans have made all that risk attractive to those in charge of running and funding them: It’s simpler to put money in riskier assets and bet on rosy investment returns than to commit more taxpayer money upfront.

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Economists have been saying for years that public pensions should be shifting to safer investments as their members age. But Andrew Biggs, an economist at the American Enterprise Institute who specializes in retirement financial issues, said public pension systems hadn’t listened.

In fact, they’ve taken on even more risk.

As of 2018, state pension funds had on average invested 74 percent of their money in what Mr. Biggs called risky assets, including stocks, private equities, hedge funds and commodities. That was up from 69 percent in 2010, after the 2008 shock, and from 61 percent in 2001, when economists first began challenging the way public pensions operate.

“This was completely predictable,” Mr. Biggs said. “They are holding tons of equities when they’ve also got tons of retirees.”

California’s huge state pension system, known as Calpers, is offering a clue about the investment losses these programs face. It posts an investment snapshot, which suggests the total value of its investments has fallen by some $69 billion since mid-February, when it peaked at about $404 billion. Even then, it was short of what it needed to pay all the benefits it will ultimately owe.

So were Illinois, Kentucky, New Jersey, Connecticut, Colorado and many other states. Many counties and cities, too, had large pension shortfalls even before the current market crash.

And in most cases, state laws and constitutional provisions make those pensions sacrosanct — they have to be paid, come what may. Attempts to reduce benefits in meaningful ways often meet with fierce opposition, and failure: In 2015, for instance, the Illinois Supreme Court issued a sweeping, unanimous decision that every penny had to be paid, even the pensions that current public workers had not yet earned.

To reduce costs, some states have tried closing their pension plans to new hires. In Kentucky, state lawmakers met last month in a locked-down capitol to consider such a maneuver for its teachers’ pension plan. The state has also pushed covered workers to pay more; it already takes 13 percent from current teachers’ paychecks, more than twice the payroll tax rate for Social Security.

The other strategy is to turn to taxpayers — the very people and businesses that are now facing shutdowns, layoffs and shriveled balances in their 401(k) accounts.

Illinois chose the path of widespread taxation to pay its retirees’ pensions, including a 3 percent compounded annual increase, a figure well above the recent rate of inflation.

The state doubled its gas tax last year. It tripled a real estate transfer tax, and raised taxes on cigarettes, vaping, electricity and even dry-cleaning fluid. It made marijuana legal and taxable. It approved gambling, so casinos can be taxed, too. Tags for virtually all cars and trucks went up in January.

Chicago raised parking meter rates and put meters on streets that didn’t have them. It raised taxes on restaurant meals, increased a “congestion tax” on single-occupant cars and tacked a $3 fee on ride-hailing services.

And Peoria recently added a yearly “property fee” to raise money for police and firefighters’ pensions. (By making it a “fee” instead of a “tax,” the city could bill entities that are normally tax exempt, like churches and schools.)

The tax situation has driven some residents out of the state.

“Illinois is literally now taxing you for everything,” said Adan Villafranca, a school custodian in the Chicago suburbs who moved his family to low-tax Indiana. “You go to the store and they tax you for a bag. What are they going to tax you for next, the air that you breathe?”

The only other option is to reduce benefits — an approach that would be certain to meet fierce resistance and could be futile. In Illinois, for example, it would require amending the State Constitution.

Benefit cuts may be inevitable, Ms. Pappas said, and they may not be up to voters or the courts.

She volunteered for George Papandreou, a former prime minister of Greece, when his country became a financial pariah in 2010 and had to get rescue loans from the International Monetary Fund and other European countries.

Greece had also promised costly pensions to millions of people, but was forced to reduce benefits to receive those loans, she said.

“They didn’t want to,” she said. “They didn’t have any choice.”

Source: The New York Times